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Thursday, August 7, 2008

Build-A-Bear On Its Death Bed?

Build-A-Bear's (NYSE: BBW) stock has come crashing down to its current level of $6.51, having dropped 66% from its level just one year ago. Analysts cite a large drop in same store sales, and there is a fear out there that Build-A-Bear is a fad whose time has now passed. In fact, same store sales have been declining for all but one of its last eight years, as seen from the chart below.

Same store sales is Wall Street's favourite metric for evaluating retailers. Wall Street will take one look at this trend, punish the stock, and move on in search of the next big thing. However, could it be that a business still has value despite the pressure on same store sales that we see above? After all, same store sales is but one metric.

For example, if costs are dropping faster than sales, there are still profits to be made! Unfortunately, Build-A-Bear's full-year operating margins as a percentage of sales have actually been in decline for the last three years.

But consider the level of sales a Build-A-Bear store achieves in its first year. If that number is ridiculously high, then there is room to allow for declines in the next several years while still making comfortable profits. For the sake of comparison, here are Build-A-Bear's sales per square foot compared with an assortment of successful American retailers:

Clearly, Build-A-Bear has some leeway to still make profits despite the turbulent same store sales. Indeed, as reported by CEO Maxine Clark on the Q2 conference call, a Build-A-Bear store generally pays for itself after its first 12-15 months.

Does this make the stock an automatic buy? Certainly not, as one still has to evaluate whether the stock is low enough to make the purchase worthwhile. But with a P/E of 9 and no debt on the balance sheet, Build-A-Bear could offer just the type of value we're looking for, as discussed here.